China’s July Lending Underlines The Real Direction

WHEN there was a big year-on-year surge in China’s lending in June some commentators took this is an indication that Beijing was going soft on its economic reform programme.

Instead it seemed more likely at that time that, as the whack-a-mole game continued, another few moles had popped up via the shadow banking system. The chart above, from this blog post, perfectly illustrates how China has taken a giant hammer to the shadow-banking system.

Given the consistency of commentary from China’s leaders on their commitment to reform, this seemed to be the more likely explanation, especially given that over the whole of H1 2014 the year-on-year increase in lending was just 4%. This compared with the 9% increase for the full year 2013.

And so the good news for China’s long term future is that our interpretation of events appears to be backed up by the official lending data for July.

“China’s credit growth dropped sharply in July after surging a month earlier, reflecting Beijing’s concern over a rapid build-up of debt in the world’s second-largest economy,” wrote the Wall Street Journal in this article.

The WSJ added that:

Total social financing—a broad measure of credit in the economy that includes bank loans, bonds and other shadow bank financing such as lightly regulated trust products—dropped to 273.1 billion Yuan in July from June’s 1.97 trillion Yuan. This was the slowest growth since October 2008.

Industrial production slowed slightly in July as investment also declined, along with a further weakening of the property market.

In the context of these determined reform efforts, chemicals companies must therefore question the credibility of claims that economic growth in China will accelerate in H2.